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April 18, 2011

Hedge Fund Assets Near 2008 Peak Levels

Flows resume despite lackluster performance

Hedge fundsare bounding back, with return-hungry investors pumping up the industry to a size not seen since before the financial crisis laid it low.

The Wall Street Journalreports total hedge-fund assets are approaching $2 trillion and are soon expected to surpass their peak in early 2008. Even start-ups and smaller funds, which were shunned by many investors in the wake of the crisis, are benefiting.

According to the paper, the resurrection of hedge funds, which invest money for wealthy individuals, pension funds and other large investors, marks yet another sign that the effects of the financial crisis are receding.

The industry suffered its worst year on record in 2008, with the average fund losing 19%, according to Hedge Fund Research Inc. Those losses, coupled with client withdrawals and the liquidation of some funds, cut the industry's size by roughly one-quarter.

The Journal notes the industry had been clawing its way back since early 2009. Hedge funds pulled in $55.5 billion in net new money in 2010, the most since 2007, according to Hedge Fund Research. Figures for this year's first quarter also are expected to be robust.

The gains are coming despite performance that has been lackluster of late.

The average fund earned 20% in 2009 and 10.3% in 2010, according to Hedge Fund Research, failing to match the 26.5% and 15.1% gains in the Standard & Poor's 500 stock-index in those two years.

In this year's first quarter, the S&P 500 rose 5.4%, more than three times the 1.6% average hedge-fund gain, according to the research firm.

Pension fundsand other big investors, however, need to diversify beyond the stock market, and the current low-interest-rate environment has made it difficult to find attractive returns elsewhere.

"Flows into quality funds have resumed," Lawrence Robbins, head of Glenview Capital Management told the paper. The firm suffered significant losses in 2008, but has brought in more than $1 billion in new money since the bottom, according to a person familiar with the firm.

Nevertheless, fund managers told the paper the industry isn't on the kind of roll it was before the financial crisis, when it was growing more rapidly and rookie managers found it easy to raise money.

The industry is saddled with new regulationthat grew out of the crisis. Investors are being more selective about where they invest. Hedge funds remain restrained in their use of leverage—or borrowing to amplify their returns, which increases risk. Managers are wary of scrutiny from insider-trading investigations and calls from Washington for more regulation.